Correct - Fitch: No Rating Impact on Turnstone MidCo2 from Dental Directory Group Buy and Tap

(The following statement was released by the rating agency)
LONDON, May 06 (Fitch) This announcement corrects the version
published earlier
today. The amount of IDH Finance plc's outstanding senior
secured floating rate
notes is GBP125m (GBP225m pro forma for the tap issue) and not
GBP200m (GBP300m)
as previously disclosed.
Fitch Ratings says that UK-based primary care dental services
provider
Integrated Dental Holdings' (IDH) acquisition of The Dental
Directory (DD) has
no impact on IDH's credit profile. Fitch rates IDH's parent,
Turnstone Midco 2
Ltd, Issuer Default Rating (IDR) 'B+' with a Stable Outlook.
In addition, we believe that IDH's announced bond tap issue of
GBP100m to
refinance amounts drawn under its revolving credit facility
(RCF) will not
affect the 'BB-'/'RR3' ratings on IDH Finance plc's outstanding
GBP125m (GBP225m
pro forma for the tap issue) senior secured floating rate notes.
This is because
the increased senior debt is matched by a growing
revenue-generating asset base
resulting from on-going bolt-on M&A and therefore does not
change our opinion
regarding above-average recovery prospects for senior secured
creditors, nor the
already low recoveries for IDH's GBP75m second lien notes, which
are rated
'B-'/'RR6'.
The acquisition of DD, a leading multi-channel distributor of
dental supplies
and consumables to the dental sector, will further cement IDH's
vertical
integration in the dental clinics value chain. Despite a mild
erosion expected
in EBITDA margin in FY15 (ending March 2015), Fitch assumes some
cost savings in
procurement over the medium term and some diversification to the
business
profile of the group. This is mitigated by slightly slower
deleveraging than
previously assumed.
DD's enterprise value is mainly debt-funded by drawings on the
RCF. Once the
drawn RCF is refinanced via the planned issue of additional
notes, the RCF is
expected to be drawn again over the next few years to support
continuing bolt-on
acquisitions of dental clinics in the UK, in line with the
management strategy
of increasing scale in a fragmented market. Adjusting for
contribution of such
acquisitions, Fitch forecasts slight deterioration in funds from
operations
(FFO) adjusted net leverage to over 6.0x for FY15. However, over
the longer-term
positive free cash flow (FCF) along with the increasing scale of
the business
and profitability should support deleveraging, sending FFO
adjusted net leverage
lower to 5.0x-5.5x range by March 2018.
We continue to assume that IDH's acquisition strategy will be
aimed at taking
advantage of the fragmented dentistry market in the UK. The
acquisition of small
practices with 'evergreen contracts' with the NHS is a sensible
strategy as it
complements the group's operations and thus does not bear major
integration
costs. However, failure to integrate the latest and future
acquisitions, leading
to either the revenue contribution of new practices being below
historical
levels, or an erosion of group profitability due to cost
overruns could put
pressure on the already stretched credit metrics.
Fitch will continue to focus on IDH's ability to generate
positive free cash
flow (FCF) to help support the on-going acquisition activity, as
financial
headroom under the current ratings remains limited for large
debt-funded
acquisitions over the next two years. Reduced FCF margin below
4% of sales due
to significant profitability erosion, combined with aggressive
future
acquisitions translating into sustained higher-than-expected
leverage, could be
detrimental to the ratings.
Contact:
Garima Gupta
Analyst
+44 20 35301463
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
Pablo Mazzini
Senior Director
+44 20 3530 1021
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530
1103, Email:
peter.fitzpatrick@fitchratings.com.
Additional information is available on www.fitchratings.com.
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